Nobody In Congress Dares To Close The Trillion Dollar Loophole That Apple, Google And Microsoft Use To Reduce Taxes

One recurring theme of the fiscal cliff debate is the desire to
close certain loopholes in the tax code.

Still, almost nobody in Washington has brought up closing one of
the most significant loopholes – the Subpart F
corporate tax loophole, which was detailed
in a Senate report released in late September.

According to the report, that loophole is a major reason that the
share of federal revenue derived from corporate taxes is a third
of what it was in 1952.

Here are the stats: American multi-national corporations have
more than $1.7 trillion in undistributed foreign earnings — some
of which is deliberately held offshore to defer taxation — and
taken as a whole, keep at least 60 percent of their cash
overseas.

The corporate tax rate is a flat 35 percent, but companies with
controlled foreign companies have a way to bring that rate
down.

Senate Report

The investigation explains that, to exploit the loophole, a
company will "sell" their intellectual property rights to a
foreign, controlled company in a tax shelter.

That controlled foreign company gains the profits from domestic
and international sales without the burden of American taxation,
since the income is considered active.

The multinational will then occasionally repatriate some of the
income through permissible short term loans between the
controlled foreign company and the American corporation.

Meanwhile, the main multinational uses the foreign-held
corporation as a tax-free bank account.

The issue is, the intellectual property was mostly developed in
the U.S., and these companies are keeping mountains of untaxed
cash reserves offshore. For instance, according to the report
Microsoft
kept half of their retail sales revenues offshore
between 2010 and 2011.

Here are the top companies with offshore cash reserves exceeding
$5 billion:

Most of these companies are tech, pharmaceutical, or medical
technologies companies — industries where patents and
intellectual property define the business model.

Some companies like HP,
Cisco,
Microsoft, Coca-Cola and Johnson & Johnson keep all or
almost all of their cash offshore.

Here's the main point: Both sides have talked about closing
loopholes in the tax code. At the same time, both sides have
taken vast amounts of money from all of these companies. The
companies have been aggressive
lobbyists and — especially with
technology and
pharmaceuticals — very generous campaign donors.

That's one of the reasons that Subpart F hasn't been an issue in
the fiscal cliff talks. While everyone loves to talk about
closing loopholes, nobody wants to close the big ones that are
used by powerful entities.